Monthly Archives: April 2017

On April 21, the White House released a memorandum placing a reconsideration of the Dodd-Frank Act’s Orderly Liquidation Authority (OLA) on the administration’s agenda. The memorandum directs the Secretary of the Treasury, Steven Mnuchin, to review and report on the OLA within 180 days, focusing on whether the OLA might lead to excessive risk-taking by financial institutions, counterparties, and creditors; whether invoking the OLA could lead to losses for the U.S. Treasury; and whether the OLA comports with a February 3 executive order outlining the president’s principles for financial regulation. Additionally, the memorandum calls for an assessment of whether bankruptcy, under a Bankruptcy Code amended to accommodate financial institutions, would be a more effective method of resolving failed financial companies than the OLA.

President Trump’s memorandum parallels congressional efforts to amend the Bankruptcy Code, but it is not structurally identical. Earlier in April, the House passed H.R. 1667, the Financial Institution Bankruptcy Act (FIBA), which would amend the Code to facilitate a single-point-of-entry (SPOE) resolution in which only the top-tier holding company of a financial institution enters bankruptcy, while the operating subsidiaries continue running as normal and receive support from the top-tier holding company. Nearly identical versions of FIBA passed the House in 2016 and 2015. FIBA, as passed by the House, would not repeal title II of the Dodd-Frank Act. It would thus make two resolution systems available for financial institutions.

Representative Jeb Hensarling’s CHOICE Act, a sweeping package of proposed financial reforms, also incorporates the text of FIBA as it currently stands. The CHOICE Act, however, would also repeal title II, leaving FIBA as the single formal structure for resolving financial institutions.

On March 22, the Supreme Court decided Czyzewski v. Jevic Holding Corp., holding that bankruptcy courts may not approve structured dismissals that provide for distributions that deviate from ordinary priority rules without the affected creditors’ consent. According to the Court, Chapter 11 contemplates three possibilities: (1) a confirmed plan; (2) conversion to Chapter 7; or (3) dismissal. Absent an affirmative indication of congressional intent, the Court was unwilling to endorse a departure from the Code’s priority scheme; thus, it rejected the Third Circuit’s “rare cases” exception allowing courts to disregard priority in structured dismissals for “sufficient reasons.”

Dechert warns the decision could short-circuit “creative solutions to difficult and unique issues” and impose a “real economic cost” on debtors, creditors, and the courts. PretiFlaherty speculates that Jevic might give additional leverage to priority claimholders who know that debtors and secured creditors now “have one less arrow in their quiver.” More generally, Winston & Strawn predicts bankruptcy professionals will “look to Jevic for insight” when developing exit strategies in difficult cases.

Foley & Lardner highlights the Court’s basic commitment to absolute priority, while noting the Court’s careful distinction between final distributions, which must follow absolute priority, and interim distributions, which may break from priority to serve the Code’s ultimate objectives.

DrinkerBiddle emphasizes that Jevic provides “support for employee wage orders, critical vendor orders, and roll-ups,” a “shot in the arm for the sub rosa plan doctrine,” and “fodder for objections to class-skipping gift plans.” Duane Morris agrees, noting that Jevic may be “cited in unexpected ways” in battles about gift plans, critical vendor payments, and the like.

Sheppard Mullin wonders how consent will be determined in structured dismissals and whether features of plan confirmation other than absolute priority — for instance, cramdown, the bests interest test, and bad faith — will be imported into the structured dismissal context as well.

The exit consent technique refers to an offer by a bond issuer to all the bondholders to exchange the existing bonds for new bonds or other types of securities, on the condition that the tendering bondholders consent to a resolution to amend the terms of the existing bonds to make them less valuable.

In Marblegate and Caesars, the U.S. District Court for the Southern District of New York held that the relevant exit consent in each case violated Section 316(b) of the Trust Indenture Act of 1939, reasoning that Section 316(b) prohibits not only impairment of a dissenting bondholder’s formal right to payment, but also “practical impairment” of such right. This article argues that there is no sufficient justification for giving Section 316(b) a broader interpretation than its plain language suggests. Such an interpretation is inconsistent with the legislative history of Section 316(b) and how the term “impairment of a right” is used in other contexts. In January 2017, in a 2–1 decision, the Second Circuit reversed the district court’s ruling in Marblegate, holding that Section 316(b) prohibits only non-consensual amendments to an indenture’s core payment terms.

In Assenagon, the U.K. High Court held that the exit consent arrangement in that case was unlawful because it breached the abuse principle under English law. This article argues that the application of the abuse principle in exit consent cases should be considered in light of the facts and the parties’ presumed intention. A consenting bondholder does not abuse its power when it is simply making a rational choice. Furthermore, it cannot possibly be the parties’ presumed intention that, when the issuer has made an exchange offer coupled with an exit consent, the consenting bondholder is required to prioritize the interests of the dissenting bondholders over its own interest.

By Adrian Walters (Chicago-Kent College of Law, Illinois Institute of Technology)

As Oscar Couwenberg and Stephen Lubben have demonstrated, foreign firms commonly file for bankruptcy in the United States in order to take advantage of chapter 11 of the Bankruptcy Code. But overseas critics tend to balk at the ease with which global bankruptcy jurisdiction can be engineered in the United States through a combination of the Bankruptcy Code’s low bar to entry and the worldwide effects of a bankruptcy case. They complain that the formal structure of U.S. eligibility and jurisdictional rules promote abusive bankruptcy forum shopping and the harmful imposition of U.S. norms on non-U.S. stakeholders.

This article advances a revised account of U.S. bankruptcy jurisdiction over non-U.S. debtors from a distinctively Anglo-American standpoint. The article’s thesis is that critics overemphasize formal jurisdictional rules and pay insufficient attention to how U.S. courts actually exercise jurisdiction in practice. It compares the formal law “on the books” in the U.S. and U.K. for determining whether or not a domestic insolvency or restructuring proceeding relating to a foreign debtor can be maintained in each jurisdiction and provides a functional account of how U.S. bankruptcy jurisdiction over foreign entities is exercised in practice, using the concept of jurisdictional congruence as a benchmark. While the American and British approaches to abusive forum shopping are developing on different legal cultural paths, the article also identifies reasons for thinking that they are trending towards a rough functional equivalence influenced, at least in part, by the U.S.’s commitment to the UNCITRAL Model Law through chapter 15 of the Bankruptcy Code.

In sum, the article lays foundations for further critical reflection on the roles that judges, practitioners, and the “center of main interests” standard play in configuring the market for international bankruptcy case filings and in facilitating and regulating forum shopping in that market. Through the lens of legal development, it also presents some practical and policy challenges for universalism, international insolvency law’s dominant theory.

“New GM” acquired GM’s assets in a bankruptcy court-approved sale. New GM assumed liability for claims arising from any accidents occurring after the closing date and for any express vehicle warranties. Three classes of vehicle purchasers were not covered:

– prepetition purchasers with economic damages as a result of defects not covered by an express warranty, and

– postpetition purchasers of used GM vehicles who claimed economic damages as a result of defects.

The Second Circuit held that a debtor may sell free and clear of successor liability claims, but independent claims against New GM were not covered by the “free and clear” sale.

The court applied a variation of the “relationship test,” which requires prepetition conduct by the debtor plus some minimum contact or relationship with the claimant, to determine whether the purchasers held “claims.” Both pre-closing accident claims and economic loss claims by prepetition purchasers constituted “claims,” but postpetition purchasers of used vehicles did not have “claims.”

To determine whether the holders of prepetition claims received sufficient notice, the Second Circuit focused on GM’s knowledge of the claims instead of its knowledge of the identity of the creditors.

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The Harvard Law School Bankruptcy Roundtable promotes dissemination of academic and practitioner views of current bankruptcy issues, via weekly posts targeting issues of interest, typically linking to a more extended analysis elsewhere. For inquiries and comments, please contact us at bankruptcyproject@law.harvard.edu.